HAS CHINA EVER BEEN PREPARED FOR THE TRADE WAR WITH PRESIDENT TRUMP?
“There is no instance of a country having benefited from prolonged warfare.”
Siva Yam, CPA, CFA, President
Paul Nash, Ph.D., Editor
U.S.-China Chamber of Commerce
August 23, 2018
According to the Chinese zodiac, this year is the Year of the Dog or the Year of Wùxū in the Chinese sexagenary cycle. According to folk religion, this is a challenging year, and harmony is crucial to maintaining prosperity. Indeed, the year of 2018 has proven to be extraordinary, and harmony has given way to continued disputes and accusations.
November last year, President Trump became the first foreign dignitary to be hosted in Forbidden City when President Xi broke the tradition. When President Trump concluded his trip to China, he walked away with $250 billion of business deals. Many China hands commented that [President Trump] is “...so over-infatuated with his courtship, so hungry to ingratiate himself, and so eager to be bathed in acceptance that he had ended up being taken...”
Two months later, President Trump placed a 30% tariff on foreign solar panels, which China is the world leader. On the same day, he imposed a 20% tariff on washing machines for the first 1.2 million units imported during the year. In 2016, China exported $425 million washing machine to the U.S. Then in March the administration issued formal steel and aluminum tariff proclamations effective March 23, and about the same time, released its report finding China was conducting unfair trade practice under Section 301 of the Trade Act of 1974. Over 1,300 categories of Chinese imports were listed for the tariffs. The 2018 U.S.-China trade war began, and it goes beyond trade. It has expanded to other areas including national security, technology transfer, immigration, and even education.
Although officials from both countries hold talks in Washington over the dispute, it is unlikely that the trade war will end soon. On the contrary, it is escalating. President Trump’s actions were unforeseen by many China hands and probably not even by the Chinese government, even though President Trump had made numerous promises during and after the presidential campaign.
Sun Tzu once said: “There is no instance of a country having benefited from prolonged warfare.” Any prolonged trade war will not be in the best interest of the global economy because it creates uncertainties and anxieties. The trade war will be detrimental, particularly, to China’s economy and social stability.
First, China builds its country on low-cost, export-driven economy even though the country has strived to reduce its reliance on exports in recent years. Second, most if not all exports from China to the U.S. can be produced by the U.S. or other countries though U.S. consumers will end up paying for higher prices. Third, certain U.S. export to China, particularly, technology, are essential. The near bankruptcy of ZTE due to the sanction by the U.S. is an example. If U.S. computer chips are not available to China, China economy would probably be paralyzed. Fourth, China’s demonstration of its military power, technological advancement, and new wealth with an eagerness to emerge as a superpower have created unease among its neighboring countries. It will prove difficult for China to line up support to make its case. Fifth, China’s economy is supported by its exuberant property market. If the economy slows, the real estate “bubble” may burst. The consequences could be dreadful.
In summary, although it is not clear what the trade war will bring us to, both countries should avoid a prolonged trade war. Especially, it is critical that China will end the trade war diplomatically soonest. China needs to understand that President Trump is not a traditional U.S. president. He understands the power of celebrity and social media and could be unpredictable.
Please forward any comments to firstname.lastname@example.org or contact Siva Yam at 312-368-9030.